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Global Credit Research - 09 Jul 2010
Moscow, July 09, 2010 -- Moody's Investors Service has today changed the outlook on the B2
corporate family rating of Ukrainian steel producer Metinvest B.V.
to stable from positive. At the same time the national scale rating
was downgraded to A2.ua from A1.ua.
The rating action was prompted by a recent announcement made by Metinvest
that it was in negotiations to acquire the majority of Ilyich Steel Works
(Ukrainian steel producer), a transaction which indicates a more
opportunistic approach to development initiatives that current built into
the positive outlook. At the same time the stable outlook continues
to reflect the resilience of the operations of Metinvest and its good
cost position as well as its moderate leverage.
Moody's commented that there are still a number of uncertainties
related to expected cash outflows to complete the transaction, including
the payments at the deal's signing and any future contingent payments.
At present Moody's expect that the cash outflow for this acquisition
over the next two years might lead to a material increase in total debt.
This elevated debt level in turn might lead to credit metrics, particularly
the (CFO-Dividends)/ Debt ratio, to move outside our guidance
of 35% per year-end 2010 though the debt to ebitdta measure
would remain commensurate with the current rating. However,
the liquidity profile of Metinvest remains modest with debt maturities
of around USD 930m by the end of 2011.
Recently Metinvest announced the possible acquisition of a significant
stake (at least 75%) in the assets of Ilyich Iron and Steel Works.
As purchase consideration we expect Metinvest to exchange assets,
to make possible cash payments and to give a commitment in the range of
USD 2.0 billion to modernize the Ilyich assets over the next 5
to 10 years. Even though we believe that the transaction makes
sense for Metinvest in the long-term, given that it already
supplies Ilyich to a large extent, the immediate effect is taking
away any significant upward pressure on the rating particularly in the
light of the modest short-term liquidity of Metinvest.
Since Metinvest is a fully integrated steel manufacturer with significant
coal and iron ore resources its operating performance within the next
two years should improve considerably compared to 2009 driven particularly
by an increase in steel, iron ore and cooking coal prices in the
first half 2010 which nonetheless have come to a halt recently due to
increasing uncertainty about the pace of the economic recovery which might
be slowed by the sovereign debt crisis.
Despite the strong expected cash flow generation and high cash balance
helped by a bond issue of USD 500m in April 2010 Metinvest's liquidity
profile remains just sufficient for the next 4 quarters. If the
company were not to continue to refinance progressively its short-term
debt maturities, cash sources particularly consisting of cash and
funds from operations might not be sufficient to fully cover cash outflows
for working capital, capex, debt repayments, dividends,
possible purchase consideration for Ilyich and cash for day-to-day
needs. Moody's notes that a significant part of the company's
debt is based on secured but short term trade credit lines, which
in the past have constantly been rolled over.
Moody's will monitor the final terms and conditions of the IIyich
transaction and the extent to which it reflects a material change in the
financial policy. Separately the rating could be downgraded if
Metinvest short term liquidity profile was to tighten .
Downward pressure could also be exerted on the rating as a result of significantly
higher leverage caused by an increase in the absolute level of debt,
combined with lower cash flow generation not moving towards a CFO-dividends/debt
ratio closer to 35% in 2010 and debt/EBITDA sustainably above 2.5x,
stemming either from material negative free cash flows or debt-financed
acquisitions or shareholder friendly actions, such as significant
dividend payments to the parent. Failure to manage more headroom
under covenants - contrary to Moody's current expectations -
would also result in pressure on the rating.
The rating of the Metinvest bond at B3, a one notch down difference
with the CFR, reflects a significant amount of secured debt which
is ranking ahead of the unsecured bond. However, the bond
benefits from upstream guarantees from some of the major profit generation
operating entities, such as the company's iron ore mines and
with the possibility of additional upstream guarantees to be implemented
from the Metinvest's major steel producing entity, Azovstal,
as soon as the outstanding Azovstal bond has been repaid in 2011.
These upstream guarantees provide the bondholders direct access to the
company's cash generating entities and therefore avoid structural
subordination compared to existing bank agreements. As a result
of the envisaged transaction with Ilyich, the coverage provided
by guarantees for the Metinvest bond might be eroded if substantial assets
of the guarantors belonging to Metinvest were to be merged with the Ilyich
assets into a new entity, though this would likely not result in
additional notching. Given the relatively high amount for secured
debt, Moody's has assumed in its waterfall analysis that trade
debtors would be treated similar to the treatment of secured debt holders
and therefore trade debtors also rank ahead of the proposed bond issuance.
The principal methodology used in rating Metinvest was Moody's global
steel methodology, published in January 2009 and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Moody's last rating action on Metinvest was when the outlook on
the B2 corporate family rating was changed to positive from stable on
23 April 2010.
Metinvest B.V., a company set up under Dutch law,
but with major operations in the Ukraine is the largest steel and iron
ore producer in the Ukraine. In 2009 the company generated revenues
of USD 6 billion and operating profit of USD 604 million. Metinvest
is owned 75% by System Capital Management, an investment
holding company in the Ukraine. 25% of Metinvest's
shares are owned by Smart group, also based in the Ukraine.
Eric de Bodard
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
Moody's changes the outlook on Metinvest's B2 corporate family rating to stable
No Related Data.
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